How adventurous investors can beat inflation

published 17 May 2011

Inflation remains a problem for the British saver.

The latest figures, out this morning, show that the consumer price index is rising at 4.5% a year. The retail price index (often seen as a better cost-of-living gauge) is rising at 5.2% a year.

How can you stop your savings from being eroded? Well, the good news is that there are options out there, particularly with the launch of the latest issue of National Savings & Investment bonds.

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But what if you're looking for something more adventurous?

If you've the stomach for putting your money into another currency, you might want to look east.

Two UK-based options for beating inflation

National Savings & Investments (NS&I) has recently re-launched its index-linked savings certificates. My colleague Merryn Somerset Webb went into the details in a recent blog post (The best way to cut your tax bill), so I won't repeat it here.

Suffice to say, you put your money (up to £15,000 per person) away for five years, and you get paid RPI plus 0.5%. And it's tax free too.

The worst that can happen is that interest rates rise above inflation, and so other bank accounts start to beat the return you're achieving on NS&I. But you're still getting a tax-free, inflation-beating return. As worst-case scenarios go, that's not a bad one.

Those with a touch more appetite for risk might want to look at a bond tipped by my colleague Bengt Saelensminde in his Right Side email recently. Royal Bank of Scotland has a corporate bond which is easily accessible to retail investors, which pays out either 3.9% a year or the RPI rate, whichever is higher. We'll look at this in more detail in a forthcoming issue of MoneyWeek, but you can check out Bengt's views here: Inflation or deflation? Who cares?

But what if you're happier taking a significant amount of risk or you've already invested in these options you could look at holding some of your money in another currency. After all, if you can find an economy that has better prospects than the UK, then why not put your money there?

For example, the Australian dollar has appreciated massively against the pound in recent years. The Aussie has done well because the economy has remained healthy throughout most of the financial crisis as a result of its connections with the Chinese economy via the commodities trade. As a result, interest rates are far higher over there, which generally means a stronger currency.

You need to find a currency where the good news is not 'in the price'

There's a catch though the good news is in the price. As I noted last week (Three investments for these risky times), the Aussie dollar looks vulnerable to any sort of fear over commodity prices or a Chinese slowdown. Some of the froth has come off it now, but it's still very high.

But what if you could buy a currency that 'should' be higher, but isn't, because it's been held down artificially? The answer is that you can. And this is why so many experts we've been talking to recently (including Jim Rogers) reckon that Asian currencies are among the best-looking long-term investments out there.

Take the Hong Kong dollar. It is fixed to the US dollar, so at first glance, it may not seem a very promising bet. The greenback is a decidedly dodgy currency, and even if you're bullish on it, why not just back it directly?

The answer to that is because the Hong Kong dollar may not always be pegged to the US dollar. The trouble with pegging your currency to another one, is that you are subject to the same monetary policy.

The US is currently in full-on emergency mode. Interest rates are at record lows. That's because the economy is still in a mess. Unemployment is high, house prices are falling again, and economic data in general is very mixed.

Hong Kong is completely different. It's undergoing a property boom prices have recently hit new records, reaching levels last seen in 1997. Inflation is rising at an annual rate of more than 4% (it doesn't sound like much to British ears, but that's because we have one of the highest inflation rates in the developed world). And it's expected to hit 5.4% for the full year.

In other words, Hong Kong could really do with higher rates, or a stronger currency, or both. In the past, this hasn't been such a problem. That's because Hong Kongers live next to the biggest 'pile 'em high, sell 'em cheap' economy in the world. If prices get too expensive in Hong Kong, just cross the border into China.

But as Craig Stephen points out in MarketWatch, this isn't an easy option any more. When the Chinese stopped pegging their currency to the US dollar in July 2005, the yuan also appreciated against the Hong Kong dollar. So since then, the yuan has risen by 25%. Moreover, China isn't the cheap goods capital of the world anymore. It has its own inflation problems to contend with.

The easiest way for Hong Kong to make monetary conditions more suitable for the economy would be to relax or reject the dollar peg. Hong Kong's authorities aren't keen to do this. But many believe it's only a matter of time, particularly as many Hong Kong citizens increasingly favour the Chinese currency.

How do you buy Asian currencies?

The Singapore dollar is another good example. It isn't as tightly managed as the Hong Kong dollar, but it isn't free-floating either. As a result, it's likely to appreciate sharply in years to come as it becomes less strictly controlled.

Clearly putting your money into other currencies is nothing like putting it in NS&I, a savings account, or even an RBS bond. It's a lot riskier it's not for money that you might need right away, and there's always the danger that you'll lose money.

So what's the easiest way to get access to Asian currencies? My colleague Cris Sholto Heaton ran through some options including an interesting-looking fund in a recent issue of his free MoneyWeek Asia email (A simple way to invest in Asian currencies). And we'll be looking at other ways in the next issue of MoneyWeek magazine, out on Friday. If you're not already a subscriber, subscribe to MoneyWeek magazine.

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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.